Real Estate and Home

Mortgages come in two types: fixed-rate and adjustable-rate. When buying or refinancing a home, understanding the pros and cons of fixed and variable rate mortgages is critical.

In this article will cover how these two types of mortgages work. We’ll also look at the pros and cons of each. The goal is to help you pick the best type of mortgage for your specific situations.

Fixed-Rate Mortgage

A fixed-rate mortgage is exactly what its name suggests. The interest rate for a fixed-rate mortgage remains constant throughout the life of the mortgage. In a 4% fixed-rate 30-year mortgage, for example, the interest remains 4% for the entire 30 years. The rate doesn’t change even if current rates rise significantly.

A fixed-rate mortgage enables you to budget your monthly expenses for up to 30 years without worrying about your rate suddenly spiking. It is also easy to understand for first-time buyers.

Pros of a Fixed-Rate Mortgage

A fixed-rate mortgage has several advantages:

Stability: The rate never changes, so your principal and interest payment stays the same

Cons of a Fixed-Rate Mortgage

There is one significant disadvantage to fixed-rate mortgages. The interest rate typically is higher than the initial rate on a variable-rate mortgage. We’ll look at an example in a moment.

The bottom line on fixed-rate mortgages is that they are the safe, steady option ideal for many buyers.

Adjustable-Rate Mortgages

An adjustable-rate mortgage (also known as an ARM) differs from a fixed-rate mortgage in several ways. First, and most obvious, the interest rate can change over time. Second, and less obvious, is that the way the rate can change varies from one ARM to the next.

An ARM typically has some period of time during which the rate is fixed. After this initial period, the rate adjusts based on a formula typically tied to some economic indicator. Depending on the terms of the loan, the rate can continue to adjust up or down thereafter.

When shopping for an adjustable-rate mortgage, you must consider several factors:

How the adjustable-rate is set

When the rate can adjust the first time

How often the bank can adjust the rate thereafter

How much the bank can adjust the rate the first time (called an Initial Cap)

How much the bank can adjust the rate thereafter (called a Periodic Cap)

The highest (and lowest) the rate can go (called a Lifetime Cap)

The best way to understand these types of mortgages is with an example. A common adjustable-rate mortgage is called a 5/1 ARM. This means that the initial rate is fixed for five years. The rate then adjusts each year thereafter for the life of the mortgage.

A similar example is a 7/1 ARM. In this case, the initial rate is fixed for seven years instead of five.

There are more complicated adjustable-rate mortgages. For example, the rate is often expressed as something like 2/2/5. These numbers are important to understand:

The first 2: This is the Initial Cap. After the initial fixed-rate period expires, the rate can increase, at most, by 2%.

The second 2: The Periodic Cap. All future rate adjustments can go up by no more than 2%. Note: The Initial Cap and the Periodic Cap are not always the same.

The 5: This is the Lifetime Cap. Fora loan that starts at 3%, for example, the highest the rate can go over the life of the loan is 8% (3 + 5).

Pros of ARMs

Initial Rate: The initial interest rate is typically lower than a fixed-rate mortgage.

Rate Changes: The interest rate could, in theory, go down of the index used to set the rate is lower.

Cons of ARMs

Complicated: As you can see from the examples above, an adjustable-rate mortgage has a lot of moving parts

Risky: The interest rates could rise significantly over time.

How to Decide

Deciding between a fixed-rate and adjustable-rate mortgage is not an exact science. There are, however, several questions you should consider:

How long do you plan to live in the home? For those who plan to stay in the home more than a few years, a fixed-rate mortgage is often a better option. In contrast, if you plan to stay in the home for fewer than 5 years, a 5/1 ARM may be ideal.

How important is it to have a set monthly budget? If you have little room for extra expenses, an ARM may be the wrong choice.

Do you think rates are more likely to rise or fall? This is a bit of a guessing game. With rates at historic lows, however, it seems more likely that they will rise. Rising rates make fixed-rate mortgages more attractive.

We Prefer Fixed-Rate Mortgages

As you can tell, we generally favor fixed-rate mortgages. The fact that mortgage rates continue to slide means that fixed-rate mortgages are more competitive than ever when compared to variable-rate options. But that doesn’t mean that a fixed-rate loan is best in all cases.

Variable-rate mortgages got a pretty bad reputation following the big financial crisis of 2008. While it’s true that variable-rate mortgages should be handled carefully, they shouldn’t automatically be off the table if you’re about to purchase a home. In fact, these loans are making a comeback nearly a decade after they received villain status.

ARMs Work in Some Cases

A variable-rate loan offers lower rates and payments during the introductory period of a loan term. This allows people to buy larger homes than they might be able to with a fixed-rate loan. This loan type could save you a lot of money if you plan to stay in the home for a short amount of time. You’ll usually come out ahead with a variable-rate loan if you relocate to another area or you move to a larger home before the loan’s introductory period ends.

It’s important not to skip over the fact that the potential pitfalls of this type of loan are pretty large. Your monthly payments could increase very sharply if interest rates see a big spike. This is something you have no control over. Variable-rate loans are also complicated. This is why first-time buyers should probably stay away from this option unless they have a pretty solid understanding of how mortgages and financing work.

Here are the questions to ask when considering a variable-rate mortgage:

Editor’s Note: This is an article written by Sasha, a former Consumerism Commentary staff writer. In 2007, Sasha shared her experiences with purchasing and managing residential rental properties and the lessons learned. We published these articles in a series of ten. I’ve re-edited the pieces and consolidated the great advice into one article.

Looking to diversify your investments and take advantage of the current dip in real estate prices? While by no means a passive investment, real estate investing offers several advantages. Residential rental property can provide additional short- and long-term income and significant tax benefits as well.

But the trick’s in the buying. An error at this critical stage is one you’ll pay for again and again over the life of the property. It’s important to be a well-informed and cautious buyer, taking the time to do the necessary research.

My own experience with six rental properties has taught me a few things worth sharing.

1. Buy at the right price

A bargain now will help you to better withstand fluctuations in property value over time. That way, you can profit if (and when) you eventually sell.

You need to develop a deep understanding of what constitutes a “value” price in the neighborhood(s) in which you’re looking. As an investor, you can keep making low-ball offers and wait for the deal you want. Investors, however, generaly snap up great bargains. So, you need to be able to act quickly once your target’s in sight.

You also need to benchmark rental prices for comparable units in the area, getting a feel for demand.

The local classifieds are a great starting point for this. A few hours of research should give you a good basis for determining what you can charge. Just make sure to factor in for utilities (electric, gas, oil, water, sewer, cable, etc.), if they’ll be included in the rent.

Depending on your personal goals, there may not be enough of a spread between what you will pay out monthly — in mortgage, taxes, and utilities — and what you can charge tenants. Figure out what your spread needs to be, and analyze every house you consider against this amount.

I’m looking to make a yearly profit without much additional out-of-pocket investment beyond the down payment. Because of this, my rule of thumb is that there needs to be at least a $500 difference per month between income and costs.

Of course, a bigger spread is preferable, as it means more profit. That also provides a buffer for the months in which you go without a tenant, or when the hot water heater springs a leak.

If you’ve got a few good options to consider, the differences in the spread can aid in your decision-making.

2. Find the right neighborhood

Rental properties don’t always make good neighbors, but there are a few tricks to making it work.

Overall, it’s important to find a community where your rental property will have a good chance of being accepted. The ritziest corner of town may not be it.

On the other hand, it’s hard to find and keep good tenants in bad areas, where crime rates may be higher.

I’ve had the best luck with solid, working-class neighborhoods. These are generally middle- to lower-income areas, where tradesmen and even some businesses might reside, intermingled with the houses. One can often tell these neighborhoods by the work vans and trucks parked in the driveways.

Not only do the residents understand the value of hard work, they appreciate the effort I invest in rehabilitating and improving my properties. Your presence in the neighborhood should help to make it a better place.

Regardless of which neighborhood you choose, you never want your property to be the worst-looking one on the street. Not only will this impact your rentability, but complaints and possibly citations may follow.

If you choose a property which visibly needs maintenance, you should budget to correct these issues within the first year, and ideally prior to renting it at all. This helps to show the township or city officials that you’re one of the good landlords, committed to keeping your property up. It can make a huge difference in your experiences over the life of the property.

Each property you own serves as a reference to your work, abilities, and commitment.

3. Be aware of local rental regulations

In many locales, rental properties are treated more like businesses than residences. This can lead to many (expensive) surprises, if you don’t do your research beforehand.

For example: while 8×10 might constitute a proper bedroom in your personal home, it likely won’t be considered such for a rental property. In one local township where we presently own three properties, there are minimum ceiling heights (7′) and square footage (100 sq. ft.) for bedrooms. This is substantially different from what is required for residential homes.

Occupancy is also calculated by that same township based on the square footage of the unit. So, what the local realtor touts as a four bedroom home may only legitimately be a two bedroom home, if rented.

Township-enforced renovations can be a massive expense. In fact, I personally know someone who paid nearly $50,000 to get two basement bedrooms and a bathroom upgraded to meet code. He’d bought the house with a “finished basement,” which the previous owners had completed without a permit.

Because rental properties are treated as businesses, he was not allowed to do the work himself. Instead, he had to hire an architect to draw and seal the plans, then licensed plumbers, electricians, and building contractors to do the work. He also had to pay to relocate the existing tenants until the work was completed.

It is a safe assumption that you’ll need to bring your property into accordance with local rental regulations prior to your earning any income from the property. Knowing the issues, you can budget accordingly before you ever put it up for rent (or even put in that offer to buy!).

4. Ensure proper parking is available

In one local township, for example, parking requirements for rental and residential real estate differ substantially.

There, almost anything goes for residential homes. For rentals, though, one paved off-street parking space is required for all tenants old enough to hold a driver’s license, whether or not they actually have a license or own a car.

A house rented to a family of two fifty-something adults, an 18 year-old son, and a 20 year-old daughter would require 4 parking spaces.

Some jurisdictions may institute a flat, per-property parking space requirement. Others, a sliding scale based on square footage.

More and more municipalities are passing such regulations, which are often conditions for licensure. Landlords are being forced to either retrofit their properties to meet the new requirements or throw in the towel and sell. The latter is especially true, as many properties lack the free space to even provide sufficient paved parking.

Besides meeting existing regulations, off-street parking is desirable for landlords seeking quality tenants in areas where cars are de rigeur. People who care about their cars don’t typically like to park them on the street. Therefore, offering a protected parking spot can help you to attract better tenants.

5. Look for simple construction

That Victorian home you’ve been ogling may feature lovely leaded glass windows, but you’ll never find a suitable replacement at the local home improvement store.

A slate roof is a beautiful thing to behold, but can be terribly expensive to repair. And if the roof’s very steep, costs could go up even further.

At the end of the day, look for a house that has simple, solid construction and uses relatively standard materials, where everything’s easy to access. These are generally the easiest and most inexpensive to maintain.

As some building contractors will tell you, the shape of your structure provides a general measure of its complexity. Count the corners of your building. Four-corner buildings are often simplest to maintain and add onto. From there, more corners typically means more costs.

When examining a potential investment property, you should also consider ease of access to the heating, cooling, plumbing, and electrical systems. A panel or wall behind the shower allows quick access to plumbing in case of a problem. If that shower instead backs up to another bathroom, you might be looking at removing a whole tiled wall in order to complete a repair.

Complicated landscaping may be expensive to maintain, as well. I look for properties with a simple, small lawn, nice manageable planting bed, and ideally a large rock garden or patio. These mean less maintenance for your tenants and for you.

6. Beware of houses built on a cement slab

Not having a basement can cost you much more than storage space.

In some places, like parts of Florida and Texas, all houses are slab construction. Real estate investors have no other options. For those areas, it’s important to understand the issues involved with this type of construction, as it can have major financial impact over time.

In such structures, you can bury duct work, heating pipes, plumbing, and electric lines can in or beneath the slab. If your plumbing pipes are set beneath the cement, you may end up jackhammering out the floor just to fix a simple leak.

Moisture and drainage issues are also exacerbated in structures which are built on a slab. I’ve seen a number of slab homes which are set low to the ground, making flooding more possible and more damaging in areas without proper grading and drainage.

Depending on the area in which the home is built and how well the ground is allowed to settle before construction begins, you could also have issues with shifting. If the ground moves too much, the slab can crack. This is a costly repair that you’d rather not deal with… believe me.

Lastly, any time you have a slab home, you’re looking at less living space because you may lose a room (or space in the garage) to utilities such as the furnace, water heater, and washer/dryer. It’s a safety violation to house many of these items within the bedrooms, so they’ll need a room or walled space all their own.

Not to mention that if one of these appliances springs a leak, they’ll do a lot more damage if placed in the interior of the home, rather than the basement.

7. Look out for safety issues

An excellent value for the money, a licensed home inspector can help to identify potential safety and maintenance issues before they crop up. They can even provide ballpark estimates for correcting them.

I would personally never purchase an investment property without consulting an inspector. Far too many potential dangers lurk within and behind the walls, which can turn your House Beautiful into The Money Pit.

Radon, lead paint, asbestos, and mold are four primary concerns, as they pose significant health risks and can be expensive problems, requiring specialists to remediate.

My insurance company will not even insure a property which it believes to have lead paint, for example. I’ve also been hearing reports lately about local code officials doing tests which penetrate the top layers of paint to reveal any presence of lead below.

As a landlord, there are certain things you need to pay special attention to in order to prevent potential lawsuits. These include:

Exterior stairways without handrails or where ice/snow/rain may cause a slip hazard

Steep steps

CO and smoke detectors (fire hazard)

Obstructed doorways or exits (fire hazard)

Broken windows/glass

Cracks or unevenness in sidewalks, driveways, or walkways (trip hazard)

Open electrical circuits, outlets or wires (electrocution hazard)

Unfenced swimming pools (drowning hazard)

Lack of GFI outlets near kitchen/bathroom water facilities (electrocution hazard)

As a rental property owner, you have an increased risk of lawsuits overall. Safety is always a primary concern, though accidents still happen.

Owners often choose to limit their personal liability risk by establishing each property as its own LLC. Consult a lawyer to ensure that your other assets will be protected in the event of a lawsuit.

8. Stay close to home

Absentee landlords tend to find out about and resolve problems less quickly. In turn, this can allow them to turn into big, expensive problems.

Municipalities are none too fond of absentee landlords, either. This can also lead to bigger, more expensive problems, like fines and even citations.

Twenty minutes or less is an ideal distance. It allows you to appear involved and available to your tenants and local officials. You can also be a visible part of the community, and respond rapidly when help is needed.

One unfortunate landlord I know attempted to hold down a busy job in Manhattan and establish a startup company, while managing several properties over an hour away in New Jersey. He invested a chunk of money to fix up his properties, and everything seemed fine. That is, until a minor plumbing problem occurred in one of the houses.

It was an easy fix involving a five dollar part, but this landlord was late to respond. He didn’t have much luck with the local plumbers he reached out to, and more time passed. One day a plumber finally called back after visiting the house and angrily exclaimed that he refused to work under those conditions.

What conditions, you ask? Well, in a house of eight tenants, raw sewage had been pouring into the basement for over two months. The muck was knee-deep, the stench was abominable, and yet the tenants –college students — had never said a word.

The house was in foreclosure within the year.

9. Bigger is not always better

As your property size and square footage help to determine your tax rate, an acre or more of land really isn’t necessary.

Beyond increasing overall property value, it won’t do much as far as rental income goes, unless you have plans to build an addition or another rentable structure on the lot. Plus, you’ll mow it (or pay to mow it) and pay extra taxes for it.

Room size also won’t have a worthwhile impact on rental income.

As long as you meet the minimum bedroom requirements required by the township or city, more square footage per room doesn’t necessarily help. Four small- to medium-sized bedrooms may actually produce better income than three large bedrooms.

One of our rental properties featured a lovely (but immense) bar in its finished basement, which we immediately earmarked for removal. Giving our tenants the ultimate party basement sounded like a bad idea, and a good opportunity for added wear-and-tear/foot traffic. The extra initial cost has paid off in the long run, especially when we decided to rent to college students.

If our goal was to flip the house, we might have left it. For our intended use, though, it was more of a liability and took up extra space.

In the end, the optimal rental property (for tax purposes) is a solid structure on a relatively small lot with adequate distance from the neighboring properties to diminish noise. It features a number of small- to medium-sized bedrooms, and has enough space for the tenants to comfortably congregate without substantial excess.

10. Utilities can use you up

Utilities can be a major issue for landlords if not set up properly. If you supply utilities to your tenants, you generally cannot terminate them for nonpayment or other issues. If you do, the penalties can be severe.

Want to keep the bills in your name but have the tenants pay their portion to you? Just know that the law does not generally allow you to collect if they default on these sums, so you may risk losing out if the tenant stops paying their portion of the utility. Plus, you are still required to furnish them with these utilities, even if they fail to pay.

Unless you can incorporate a flat fee into the monthly rent figure, which covers your expenses even as costs continue to rise, it is best to insist that tenants pay utilities directly, under their own names. Then, in the event of default, you are not responsible.

This means that properties containing two or more rental units need to have split utilities. Separate furnaces, hot water heaters, meters, etc. will all be necessary.

It is much easier and cheaper to purchase an already-split property than to try to do this yourself, so this is an important factor when you are looking at multiple-unit properties. Just know that duplicate systems will mean more maintenance costs over time, however.

Purchasing and managing rental property is a great way to grow assets and establish passive(ish) income. It can be a truly great investment.

While owning rental properties may not be for everyone, it can be a successful venture if you implement a few safeguards. These ten tips will hopefully help you find and vet the perfect property for you. Good luck!

We would love for you to share your rental property experiences with other Consumerism Commentary readers.Learning from each other is one of the most powerful ways to ensure your project succeeds!

Given the option, owning assets that produceincome is a much better financial strategy than owning assets that generateexpenses.

If you own a house or apartment for your own residence, for example, you have a lot of expenses. You will need to pay for maintenance, repairs, taxes, mortgage interest, landscaping, and utilities. Or you may pay a homeowner association fee that covers some of these expenses. If, however, you own a house or apartment that is available for rent or lease, you can generate income with the property. In some cases, you can even end up with positive cash flow after you pay the expenses.

Being a landlord is a viable vocation. After all, landlords exist for every rental tenant, and they often thrive financially. Sasha, a former writer for Consumerism Commentary, owns several properties. She shared tips for buying a rental property for prospective landlords based on her own experiences.

Succeeding in the business of rental properties requires a certain set of skills and desires, and making a living isn’t always as easy as others would lead you to believe. If you want to earn a living — for example, the equivalent of a $50,000 salary — you’ll need to profit more than $4,000 per month. That’s a lot of pressure.

Consider these questions and tips before jumping into the rental property business. That way you can determine whether you have what it takes to be a landlord.

Do you like “doing it yourself?”

If you’re a handy person who likes doing your own work around the house — light plumbing, perhaps some construction, yard work, and so on — you might be a good candidate for becoming a landlord. If you’re just starting out, you may be unable to afford outside contractors while still turning a profit. Doing the work yourself saves money.

Do you know the right people?

Do you plan to expand your property portfolio beyond one or two locations? (If you want to earn a living, you’ll likely need to expand quickly.) Well, you’ll soon reach a point where you can’t handle all the work yourself.

You’ll need to call in trusted contractors to handle repairs quickly and thoroughly. If you have personal relationships with contractors, you’re in a better position to negotiate discounts and enhance your overall profit. These relationships take time to build, and it takes time to find the best people to hire for the work. If you’re able to begin your adventure as a landlord with these relationships already formed, you’ll be in a much better position.

The same is true about real estate agents. If you have connections in this business, you will have better access to potential tenants, reducing your advertising costs. You may hear of new deals coming to market before the sign is even out in the yard. Word of mouth is incredibly important, and knowing agents can remove some obstacles before you even get started.

Can you handle the 24-hour responsibilities?

Hiring a company to manage your properties cuts into your profit. Depending on the location, you may be able to afford this from just your rental income. If that’s the case, work with a property management company that will answer the phone at all hours to fix any problems that arise.

Otherwise, if you’ll be DIY-ing the management, be prepared for calls in the middle of the night from tenants for problems big and small. If you’re starting your adventure with rental properties while working at another job, you will find yourself with competing priorities often.

Do you like dealing with people?

Some tenants can be difficult; there’s no way around it. In most states, tenants also have legal rights that level the playing field in disputes. If you’re able to screen tenants well and have a choice of potential residents, you can carefully choose who will be living in your house or apartment. If, however, you need to fill a vacancy to prevent losing money every month and there aren’t enough tenants interested in the property, you may have to accept a tenant you might not like in order to prevent negative cash flow.

Even if you believe you’ve chosen well, dealing with strangers is not for everyone. Tenants will certainly not care for your property as well as you would. Even nice people can surprise you in a tenant/landlord relationship. To become a landlord with a successful business, you’ll need to be able to deal with people who might be different from you in terms of values and personality.

Do you have cash and savings to buy the properties?

The great thing about buying a house with cash, rather than with a mortgage, is that you can eliminate the expense of the mortgage payments. Every cent of rental income you receive (after maintenance expenses) is profit. That can make the difference between a rental property business that succeeds and one that struggles.

Leveraging your property purchase by using other people’s money — a mortgage — can turn out to be profitable when property values increase, but that’s not guaranteed. Loans open up the possibility of becoming a landlord to more people, easing the affordability of properties. Having the cash to buy the property outright is not necessary. If you have the money and are willing to invest in your own business, though, it will be much easier to generate a positive cash flow.

Can you charge high enough rent to cover your expenses?

In some locations, monthly rental properties are very competitive. That can drive down prices, decreasing your profit. If you’re competing in an area where most investors own their properties outright without a mortgage while you have mortgage expenses to contend with, you have less pricing flexibility than your competitors. You need to charge high enough rent to cover your expenses, while still hoping to take home a profit.

With mortgage payments to contend with and potential competition, you may only be able to profit $200 to $400 per month on a property. That’s $4,800 a year… a far cry from the $50,000 we’re talking about for earning a living. You’d need to own over 10 properties, each profiting $400 per month, in order to reach that target.

Sure, once you own multiple properties, you may also be able to increase that per-property profit due to economies of scale — buying materials in bulk and receiving significant discounts from contractors. You might be able to reach the annual income target faster, but it will still take a long time to reach the number of units necessary. Use this mortgage calculator to assist in determining how much profit you might generate.

In other locations, though, you can charge much higher rent compared to the purchase price or mortgage payment. Property prices still tend to be high in New Jersey (where I live), so potential for profit isn’t as great. Head to other areas of the country, though, and you’ll see a different story. There, you can buy properties commanding rental fees of $1,000 or more, for purchase prices of just over six figures. Let’s say your monthly mortgage payment is $450 and you can successfully charge $1,100 in rent. Well, your path to earning a living just got much clearer and shorter.

How much work are you willing to do for an extra $400 a month?

The initial hard work may pay off when you add additional properties to your portfolio. However, the path to millionaire status through rental properties is not as simple as television shows on HGTV might lead you to believe.

You may profit in terms of your financial statements, but if you consider your time and your sweat equity worth something, the calculation gets a little trickier. This is particularly true when you’re doing more work to get started.

Even in markets where home prices have remained relatively high, it’s still possible to earn a living with rental properties. The work isn’t for everyone, and that’s a good thing. Those who are willing to put the necessary labor into creating a successful business will be rewarded. While you can bring in extra cash from a sole property, earning a true living isn’t that easy. If you want to create a passive income that can support your family, you’ll need to expand and add some volume to your rental property portfolio.

Are you earning a living through rental properties?What lessons have you learned? If you’ve considered becoming a landlord but have decided against it, what held you back?

Though I’ve lived in the D.C. area for the past 5 years, I still haven’t bought a home here. It just hasn’t made sense yet, especially since I’m not sure how many more years I’ll choose to stay in this area. The properties I do own are located back in Texas and stay consistently rented out. The two of them combined cost less than one comparable home here in northern Virginia, and that’s only talking about the actual property value, so I’m quite content with the arrangement for now.

I’m not yet sure if I’ll ever move back to the land of affordable homes. Either way, one thing is for sure: it’s hard to discuss the cost of setting down roots in D.C. without talking about property taxes. The biggest surprise, though? While it’s exponentially more expensive to buy a home here versus Texas, the property taxes are actually quite a bit lower!

This is pretty fresh in my mind right now, too, as I received a tax assessment notice in the mail just yesterday. For the third year in a row, one of my properties’ values is climbing up again. Last year, for instance, it jumped $5,000; this year, it’s climbing another $8,000. While this might be good news if I were looking to sell sometime soon, it’s not good news for a long-term rental property. A higher assessment, of course, means higher property taxes. And higher property taxes mean less money in my pocket.

Don’t Blindly Pay, Especially With an Increase

With high or climbing property tax rates, it’s worth the effort to try to reduce those rates, if at all possible. After all, when filing personal income tax returns, taxpayers look for every deduction and credit, often saving hundreds or thousands of dollars. However, most homeowners simply accept their property tax bill without questions, even though it could easily be a bigger bill than their income taxes.

With the stress of income taxes done and behind us, now is the perfect time to take a look at your property value and the accompanying tax bill. The amount of property tax you owe is based on an assessed value of your house, and local governments typically assess properties every 18 to 36 months. This means that, depending on where you live, your assessment could have been performed when the market was at a peak. Add to it that the average assessments lag behind current values by about three years, and there is plenty of room for real-time error.

What If You Don’t Agree With the Assessment?

Homeowners could save thousands of dollars with a successful appeal if they only set aside a little bit of time to dispute the bill.

Of course, we’d like to think that our home values continue to increase because we want to feel that the decision to buy a home will result in a good investment over time. When it comes to assessments for tax purposes, though, it’s better to have the lowest value possible. Review your recent assessment, and consider these factors for appeal:

Comparable home prices.Look at actual sales of houses in your area. Knowing the current market is a key to determining a fair assessment for your house.

Age of the assessment. If the assessment is from over a year ago, comparable homes in your area might have sold for less money more recently.

Room count and layout. Most assessments are accomplished without definite knowledge of your house’s layout. There could be mistakes in your assessment that result in a higher value on paper, like too many bedrooms. If your basement is unfinished, you could also argue for a lower assessment

Amenities. When assessments are based on comparable home prices, you could be unfairly taxed if your home doesn’t have the same amenities as your neighbors’ houses. Don’t have a pool like the houses surrounding yours? Then, you shouldn’t have the same property tax bill.

After you receive notice of your newest assessment, review it quickly and appeal right away. You’ll be filing what’s called a Notice of Protest with your county’s ARB, or appraisal review board. Even if you would prefer to resolve your concerns informally — many appraisal districts will work with you directly to review and resolve your objections — filing this notice in time is still important, as it retains your right to escalate your dispute to the ARB at a later date. You typically have 30 days from the date the appraisal district mailed your new assessment notice to file your dispute.

You’ll want to review the property record card and look for inaccurate details. You can also take photographs of relevant features of your house and look at documentation for comparable home sales in your neighborhood. Make notes of any improvements you have made, as well as anything that may have depreciated your home’s value (a foundation shift resulting in structural damage, for instance, or mold remediation).

The ARB will typically give you about 15 days’ advance notice of your hearing, though you can occasionally postpone this to a later date, if needed.

When you have your hearing, bring all this documentation to support your case, along with copies to pass along to the board members and district representative. When presenting your case, try to keep emotional pleas out of your argument, and just stick to the facts. Firmly but respectfully present your reasoning, and hope for the best.

If you are unhappy with the decision of the district or the appraisal board, you can take your case even higher. In many states, you have the option of appealing to the state district court in the county where your property is located. Be sure to check your individual appraisal district’s options, by looking online or calling the local tax assessor-collector’s office.

It Doesn’t Hurt to Try

Authorities are aware that most assessments are inaccurate, but they won’t do anything about it unless homeowners speak up. Some homeowners are unsuccessful with the first appeal and simply give up — however, I would suggest that pressing on is worth the fight, especially if you’re paying high (or markedly increasing) taxes.

The county certainly isn’t going to do you any favors; if you want to lower your tax bill, it’s going to take some effort. The savings from a successful appeal could be substantial, though, so don’t give up until your home’s value is accurately assessed.

If you are a homeowner or have looked at buying a home in the near future, you probably know all about conforming loans. While the limits for these types of loans have remained stagnant for the past decade, steady increases in the housing marking have prompted this ceiling to rise for the first time since […]

Beginning in January 2014, the Consumer Financial Protection Bureau, or CFPB, issued new rules to protect mortgage borrowers. The rules deal primarily with what is known as the “servicing” side of the mortgage process. That’s everything that happens after a mortgage closes, from setting up escrows and crediting payments to foreclosures. There are nine rules […]

In chemistry, a catalyst is something that triggers a reaction — but the nature of the reaction itself depends on having the right elements in place to respond to the catalyst. What brought to mind that tattered remnant of high school chemistry was thinking back on buying my first house. I’ll explain how I got […]

Over the years, I haven’t been too kind to the best-selling author, Robert Kiyosaki. He’s certainly built a successful empire, and a large community people respect him for his business acumen, his willingness to try or to appear to try to help others, and his advice. However, I’ve always found his advice thin at best […]

Yesterday, I pointed out that the house you live in is an essential part of your net worth calculation. But determining the value of your house, especially if it’s the house you live in and not something you track as an investment, can be tricky. It’s easy to determine the value of your mortgage to […]

Advertiser Disclosure: Many of the savings offers
appearing on this site are from advertisers from which this website receives compensation for being listed here.
This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). These offers do not represent all deposit accounts available.Editorial Disclosure: This content is not provided or commissioned by the bank advertiser. Opinions expressed here are author’s alone, not those of the bank advertiser, and have not been reviewed, approved or otherwise endorsed by the bank advertiser. This site may be compensated through the bank advertiser Affiliate Program.UGC Disclosure: These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.